Congratulations, you
are getting married. It is my desire that God blesses
your marriage with love, health, happiness and
prosperity. One of the most difficult topics for
many couples to discuss is the financial expectation
of each partner and subsequently these are not
openly and honestly discussed. Two common reasons
no discussion occurs is that many people feel they
do not have the expertise, or it is generally assumed
that either the husband or the wife will handle
the money. Ladies, it is 2007, and you must
take the responsibility of at least understanding
the finances. Gentleman, the same holds true for
you.
When working with
my clients, I want them to articulate their goals
to me, whether they want to buy a home within 3
years, save for a vacation in 5 yrs, pay for a
child’s education in 12 years, or plan for
retirement in 25years. Please note- “goals” each
have a time frame in which the goals are to be
obtained. This helps clients define the path we
need to take. Americans, for the most part, do
not have written goals, this is the first step
to actualization. If it is committed to paper,
the likelihood of success is greatly improved.
Secondly, my clients go through the exercise of
listing their outstanding debt alongside the interest
rate at which they are borrowing the money. This
includes, but is not limited to: mortgage
payments, student loans, credit cards, and doctor
bills. We next review cash flow, in other words
account for all of the money that comes in via;
paycheck, pensions, rental income and how it goes
out/is spent. This is the most important
part of understanding your finances. [My uncle
once taught me as a young girl, that even if I
made $5 washing dishes for my brother, (we each
had a night assigned to do dishes and he would
pay me to wash dishes on his night) I was to put
part of that money away in a piggy bank.] Pay yourself
first.
Our modern lives
often require that both the husband and wife work
outside of the home. Logic would dictate that two
salaries and one household would automatically
include savings. Unfortunately, many couples do
not objectively review cash flow and account for
the outflow of their income in terms of debt. In
addition, couples come to the wedding day with
debt.
If you have debt
and can objectively look at it and commit to reduce
it within a time-frame, it can be done with simple
but often difficult decisions of forgoing immediate
gratification for a later day. Simply said, eat
a home prepared meal for lunch 2-3 times a week,
and limit dinners out to once a week. Portions
served when dining out tend to be enough for two
meals. (Lunch for the next day) You will often
eat less, helping the waistline and helping the
wallet. When shopping, ask yourself, “Do
I need this? Or is it
a want? Wants generally can be put off for tomorrow.
Pay the bills with
highest rate off the fastest and continue to reduce
the debt until finished or manageable. Next, is
saving. Generally one should have six months of
expenses in a savings account, where the money
can be easily accessed should an emergency occur.
This means money for rent, mortgage, utility bills,
food and transportation. Once the cash reserve
is achieved, you can concentrate on saving for
a goal. Allocating more money to the near term
goal, while simultaneously adding money to the
intermediate term goal as well as some more to
longer term goals.
Traditionally,
all portfolios (money) should have an allocation
of cash (savings), fixed income (bonds) and equity
(stocks). Bonds and stocks can be owned in a
variety of different ways, outright or by way
of mutual funds. Mutual funds tend to be the
most convenient method of owning securities (bonds/stocks)
because the fund generally pays a professional
money manager to buy and sell the bond/stock
according to the objective of the fund. The responsibility
of picking the right bond/stock falls on his
or her shoulders.
So how much should you have in cash, fixed income
and equities? This depends on your individual risk
tolerance. Each and every one of us can tolerate
different levels of risk. You must invest according
to your risk tolerance. Cash or cash equivalents
such as CDs generally offer a return that barely
keeps pace with inflation. Inflation erodes the
purchasing power of a dollar. Bonds pay interest
and generally will hold their value, which is why
we call it fixed income. Stocks have the ability
to appreciate in value as well as decrease in value;
however, over time this asset class has outperformed
cash and fixed income in terms of total return.
In other words, you have a better chance to make
more money with stocks, though with that chance
comes risk.
Understanding the risk you are
comfortable with takes time. Work with your spouse
and a financial advisor to determine your risk profile
and gradually fill the buckets as you go along. It
is not exciting or glamorous, but it works. A survey
of American millionaire couples, reveals that the
majority are in long term marriages. This survey
indicates that couples, who are willing to work together
through the difficult conversations regarding money,
have a greater chance
of thriving not only with wealth but also in lasting
marriages.
